By: Christopher Lewis
With the recent European debt issues, there has undoubtedly been a run to the US dollar from time to time as doubts continue to linger about the possibility of a viable solution to the problems. The Dollar has remained a “safety trade” over the years, and as long as that is the case, you will see it being bid as such.
When trading Forex, there is one essential question you can ask yourself to make the whole process easier. “What is happening with the Dollar?” is without a doubt the easiest way to trade. The US dollar is involved in 86% of all FX transactions as of 2011, and as long as that is the case, simply understanding what is happening in relation to this vital currency is enough to start formulating powerful trading ideas.
As mentioned above, the Euro has been selling off lately to the Dollar – and quite frankly with good reason. The other currencies are starting to do the same though, and this is the most important thing you can know currently. While they could be moving for different reasons, the fact that they are is really what is important. Knowing why is helpful, but not necessary. (You can be “right” about something, and still lose money if you are not careful.)
Looking at the British Pound, you have a case where the UK is experiencing anemic growth, and in fact looks set to possibly fall into recession due to the problems in the EU. Not only are British banks heavily exposed to debt issues in Europe, the UK also exports 30% of its goods to that region. If Europe goes into recession, the British will most certainly feel it.
The Swiss Franc is also falling in value relative to the Dollar, albeit for completely different reasons. This pair is being artificially supported by the Swiss National Bank at the moment. The Swiss are trying hard to devalue the Franc, and have even put in a “floor” on the EUR/CHF cross. While this isn’t the Dollar, the pairs will move in concert over time. The announcement/intervention candle stopped at 0.85 in the USD/CHF pair, and it seems that it is where the floor will be in this pair. Adding to this, the run to the Dollar as a safety trade should continue to work in the favor of the SNB on this move. Under normal circumstances, traders will also buy the Franc for safety, but with the central bank willing to intervene, it takes this currency out of the realm of possibility. It should be noted that the market for the Franc is small enough that the SNB can and will succeed at keeping the Franc weak.
The Yen is a bit of an outlier, as it is also a safe haven. The Bank of Japan has been working actively to weaken the Yen, but the market is working against it. Unlike the Swiss, the Japanese are in a very heavily traded market, and it will be almost impossible for the BoJ to fight the market for anything more than a slowdown of the decline in the USD/JPY pair. The pair would be much lower if it weren’t for the BoJ, so in a sense, the USD is being lifted there as well, even if it is a losing battle over time.
The Aussie has been falling over time against the Dollar as well, and this makes sense as it is considered a “risky asset” since it is tied to commodities. The less growth, the less need for things like copper and iron, and therefore the lessened need for Australian dollars. With global growth looking like it is going to slowdown, the Aussie will be weak for some time.
As you can see, by knowing the direction of the Dollar, and quite frankly – the sentiment about risk in the markets, you can trade FX quite easily. In a lot of ways, you are either buying the Dollar or not. Against which currency can make a difference, but it all starts with that basic premise.